Credit card rewards the right way

Credit card rewards are a bonus for responsible use.  Don't forget that …

Credit card rewards are a regular part of our monthly financial activities.  With very few exceptions, we get at least 1% off of each purchase we make with our primary credit cards.

In addition to this, there can be bonuses on sign-ups for new cards.

Earn credit card rewards without shooting yourself in the foot

From the bank's perspective, the reason for offering rewards on purchases is simple: to get you to use the card.  Doing this is happy for them in a few ways:

• Triggered merchant fees.  The bank charges the merchant when you purchase with a credit card.  (You shouldn't be paying for these directly, though!)
• Annual fees.  Depending on the card, there may be an annual fee just for holding the card.  (Some people have had good luck getting the fee waived if they call to cancel the card.)
• Potential interest charges from you.  Purchasing something with a credit card creates a financial obligation.  Depending on how the charge is paid back, they can charge you interest, late fees, and more.

The credit card rewards don't put the bank in the hole when they're paid to you (except maybe as an initial promotional offer).  The merchant fees exceed this.

The bank's worst outcome is that they get a bit less, net, for the transactions when you buy things with the card.  The best outcome is that something bad happens and they get to charge you lots of interest and fees.

Doing credit card rewards right, starting with the offer

If you have a pulse, you'll get credit card offers.  And there will usually be enticements to apply for those offers.  It could be 50,000 bonus miles, or a $50 Amazon credit, or a 10% rebate for a certain period of time.

Doing credit card rewards right starts here.

• See what the long-term reward percentage is.  Ten percent is almost certainly going to go away after a few months, and you'll be left with 1% rebate or so.  If you already have other credit cards that give you this kind of reward, then a short-term bonanza isn't the best reason to sign up for another card.
• See what you need to do to get whatever sign-up bonus they're offering.  Do you have to make so many purchases for the first few months?  Is it raw dollar amount of purchases that matters?  The big print giveth, and the small print taketh away.
• Consider whether any spending requirements are too much.  One offer I heard about required $3,000 in purchases in the first three months.  If that's more than you'd feel comfortable charging, then it's not really worth it.  It's a recipe to get into debt.

Which brings up the other part …

Doing credit card rewards right after having the card for a bit

The sign-up bonuses have run their course.  Now, you're the owner of (perhaps another) rewards credit card.  Here are some things to do to keep doing credit card rewards right:

• If you have multiple rewards cards, know which ones are good for which purchases.  We have a couple of Chase rewards cards: a Sapphire and an Amazon Rewards card.  The Chase Sapphire card has enhanced rewards for certain kinds of purchases.  The Amazon Rewards card has enhanced rewards for Amazon purchases (shocker!) and 1% for everything else.  (It was the main reason we got it: we make a lot of purchases at Amazon, so why not?)  So we use the Amazon Rewards card for all of our Amazon.com purchases, and the Sapphire for everything else.
• If you get rewards, make sure you use them before they expire.  They may not, but of course the rewards do absolutely no good if you don't use them!
• Check for the types of rewards and make sure they're useful.  This can apply to airlines and the like, or other types of cards that have multiple ways to redeem the rewards.
• Don't be late with the payment.  This and the next tip are the killers of all credit card rewards.  If you normally spend $2,000/month on a 1% reward card, and get hit with a late payment charge of $40, congratulations!  You just canceled out two months worth of rewards.  With one late charge.  Not good!
• Don't carry a balance.  If you're carrying a balance on your rewards credit card rather than paying it off each month, then the credit card issuer has won.  Focus on getting rid of the balance rather than the rewards.  Or, even get rid of the card!  The interest is killing off the rewards.